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Dare To DeFi (Away From) Ethereum

Can Ethereum Lose DeFi to its Competitors?

There have been many shots taken at defining Ethereum’s predominant narrative and Decentralized Finance seems to be the dart that's hit the PMF bullseye.

This perspective isn’t unique to Ethereum. DeFi is a popular topic of discussion within all smart contract ecosystems — and understandably so. Competing chains are taking note of DeFi user numbers which are going in the industry’s two coveted directions: up and to the right.

The growth of DeFi Users in the Ethereum ecosystem. Source: Alethio

Ethereum’s decentralization, network effects, and abundance of developer tooling create a moat that makes it difficult for DeFi protocols to leave Ethereum for other competing smart contract (SC) platforms — a view that’s shared by several people including the team at Synthetix, a derivatives platform. Initially, the team decided to build their DeFi product on both Ethereum and EOS only to find that their initial logic was flawed and that building a DeFi platform away from Ethereum was a waste of time.

One feature that attracts developers to build DeFi products on Ethereum is the chain’s composability, which, in the simplest sense, means that a DeFi app can use other DeFi apps to perform its functions. For example, Uniswap or 0x can be used to sell a user’s collateral on MakerDAO or Compound if the user’s position is liquidated.

Composability allows developers to build DeFi layers upon the existing DeFi infrastructure. However, with the upcoming Ethereum 2.0 upgrade, where different dapps will be encouraged to occupy different shards, there are significant doubts that this level of composability will be maintained. Vitalik has published several research posts on the matter.

An Open Opportunity For Ethereum Competitors

Predictably, this uncertainty around Ethereum 2.0 is an exciting opportunity for competing smart contract platforms. EOS, Tezos, Cosmos, Algorand, and several other soon-to-launch platforms are each hoping to eclipse Ethereum as the defacto DeFi platform in their own sort of flippening.

Many of these chains have huge war chests for precisely this reason. It’s not uncommon to see projects launch ecosystem funds or offer generous grants to encourage developers to build dapps/DeFi protocols on their smart-contract platform. The bet they’re making is that Ethereum’s transition to PoS will create enough uncertainty and friction for DeFi projects that developers will turn to alternative blockchains. The other bet they’re making is that the upgrade will degrade the user experience, forcing DeFi users to migrate to competing DeFi projects that are currently being built on these platforfms.

The question then becomes: are Ethereum’s competitors ready to capture the opportunity? Do they have promising alternatives to Ethereum DeFi Projects in the first place? This article is an attempt to answer this question by examining competing projects’ DeFi infrastructure and assessing the potential of these protocols winning the upcoming DeFi wars.

EOS

EOS is the most mature Ethereum competitor. Since its launch in 2017, it has been positioned as a more performant alternative to Ethereum. The goal was to attract dapp developers to migrate their dapps from Ethereum to the free to use EOS platform, allowing for better user experience and easier adoption of dapps.

EOS has succeeded in attracting a certain class of dapps that don’t require significant decentralization or censorship resistance such as gaming and gambling dapps. However, for DeFi apps, EOS success is quite limited. Although there are a number of DeFi efforts in the EOS ecosystem, most of these are just slightly modified versions of their Ethereum counterparts.

For instance, Pizza (USDE) and Equilibrium (EOSDT) are trying to replicate MakerDAO (DAI) for the EOS ecosystem. Both mint USD-pegged stablecoins by using EOS as collateral with an over-collateralization ratio ranging between 150% (USDE) and 170% (EOSDT). The EOSDT system, for instance, has ~ 5 million EOS is collateral (approx $19M) which is tiny in comparison to MakerDAO’s $290M ETH collateral.

EOS DeFi ecosystem

Arguably the most notable DeFi app in EOS is the lending platform EOSREX which allows resource lending in EOS. EOSREX allows developers and users to borrow the resources needed to operate on EOS (CPU, RAM, NET) for some fees. The fees are used to pay interest to lenders who commit their EOS to the EOSREX liquidity pool. Although the value of EOS locked in EOSREX is higher than the value of ETH locked in MakerDAO and
Compound, the actual borrowed amount is smaller than both products.

EOS network also has a number of decentralized exchanges that haven’t been able to capture significant trading volume. The main reason is that most of the tokens issued on EOS haven’t captured significant value to begin with. Many of these tokens are dapp tokens that are used within a single dapp. However, as EOS transactions are essentially free, the DEX volumes are particularly prone to manipulation and wash trading. Hence, it is impractical to compare these volumes to the volume of Ethereum DEXs.

The daily volume on a few major EOS DEXs. Source: DappRadar

Cosmos

Despite being a newer competitor, Cosmos has captured significant attention because of its unique approach. Cosmos’ focus on enabling interoperability between different blockchains enables use-cases that directly compete with Ethereum. For example, using Cosmos SDK, it is possible for dapps to have their own Cosmos zones/chains instead of building on top of Etheruem. The most recent incident of that is Aragon’s announcement it is partially leaving Ethereum to build its own Aragon Chain using the Cosmos SDK.

The same approach could enable DeFi migration away from Ethereum by bringing DeFi to payment currencies such as Bitcoin, Zcash and Monero. DeFi protocols for these currencies can be implemented as independent Cosmos zones that interact with other zones or with the Cosmos hub through the Inter-Blockchain Communication (IBC) protocol. As an example, imagine having a Bitcoin-MakerDAO zone that interacts with the Bitcoin blockchain to use BTC as collateral for minting DAI. Even better, imagine if this MakerDAO zone can interact with multiple other zones to use BTC, ETH, and ZEC, at the same time, as collateral.

The Cosmos DeFi Vision to enable interacting currency and Dapp zones

The first step to enable such a vision is to create Cosmos zones that bring these cryptoassets into the cosmos ecosystem. Consequently, the early Cosmos DeFi efforts are doing exactly that, examples include Kava’s effort to bring XRP into Cosmos and Nomic.io Bitcoin peg zone. Once these zones are in operation and the IBC bridges are functioning, the dapp zones could simply follow.

Bitcoin Peg Zones

There has been significant interest in bringing Bitcoin onto smart contract platforms to use in DeFi protocols. Projects like WBTC and TBTC are working to achieve this goal in Ethereum. However, a considerable fraction of the Bitcoin community is looking for a solution where Bitcoin can still be used as the fee currency in these DeFi schemes.

Cosmos is an interesting alternative to Ethereum in this area. It is possible to create a Bitcoin peg zone using the Cosmos SDK to allow faster Bitcoin settlement and possibly enable the development of DeFi protocols that natively use Bitcoin. A prominent effort in this area is nomic.io’s bitcoin peg (nBTC) which creates a PoS Bitcoin sidechain. Users can lock their BTC in a reserve multi-sig wallet to mint corresponding nBTC tokens in the Bitcoin peg zone. The minted nBTC tokens will have instant finality and will open the door for multiple DeFi use cases. These DeFi products can either be implemented in the nBTC zone or in other zones that interact with the nBTC zone through IBC.

Decentralized Price Oracles

A second interesting project in the Cosmos DeFi space is Microtick. It is trying to solve one of the hardest DeFi puzzles: the decentralized price oracle problem. Currently, Ethereum’s lending protocols, e.g., Compound, use trusted price feeds to determine whether the collateral covers the loan requirements or not. There are multiple projects that have been trying to offer a more decentralized version of these price oracles.

Microtick brings to the table a new decentralized oracle design that is market-based. In that system, market makers propose a price for an asset and provide financial backing to support their price proposal. The system averages these different proposals and reaches a consensus price. Using the consensus price, traders can trade these price proposals as options. This process disincentivizes the reporting of wrong or inaccurate prices by market makers and uses market dynamics to create a decentralized price feed.

Tezos

Although Tezos has been around since June 2018, its interest in DeFi didn’t start until mid-2019. The term DeFi didn’t appear on Tezos requests for proposals (RFP) until the second round in June 2019. The reason may be that Tezos, since its ICO, has been focused on enabling on-chain governance of the protocol. However, as the DeFi narrative grew stronger, the Tezos Foundation started to direct part of its attention to this area. DeFi protocols are now top of the list in Tezos’ RFP for ecosystem grants. However, the lack of a developer-friendly language and other developer tools are limiting developers’ ability to build such protocols.

Probably the most interesting DeFi protocol being built on Tezos is Checker. Checker is a stealth project that is being developed by Arthur Breitman, Tezos co-founder and CTO. It is implementing a collateralized stablecoin for Tezos. The complete details of the project are not known yet. However, the available information shows that the project will have similarities to MakerDAO where users lock their XTZ in smart contracts. The locked XTZ can be forfeited if the peg falls below a specific threshold. The token stabilization mechanism, however, would be different than that of MakerDAO.

Another interesting feature of Checker that Arthur hinted to is that the locked XTZ will be eligible for Tezos baking rewards. If the community approves this proposal, XTZ locked to back the stablecoin will achieve higher revenue than simply baking. As further information about Checker becomes available, it is clear the project can become a cornerstone of Tezos DeFi ecosystem the same way MakerDAO is for Ethereum.

Is Ethereum’s DeFi Lead Threatened?

Given all these strong DeFi efforts on other competing smart contracts platforms, is there a real threat to Ethereum’s DeFi strong lead?

The answer to this question depends on two important factors. The first is how well the Ethereum community and influential players deal with the uncertainty around Ethereum 2.0 composability. The second is the developer sentiment and whether they are ready to change ships.

These factors are not fixed and change rapidly over time. However, as of now, it seems the winds are still in Ethereum’s favor. Firstly, there is a noticeable uptick in the Ethereum Foundation efforts to deliver Ethereum 2.0 on-time and communicating the upgrade plans to the community. The best example of that is Vitalik’s research spree during Devcon to address concerns around the transition from Ethereum 1.0 to 2.0 and the cross-shard composability of DeFi projects on Ethereum 2.0.

Secondly, the developer sentiment is still largely in favor of Ethereum. Nearly all of the new DeFi ideas are being built on Ethereum. We are regularly seeing DeFi projects being built over a weekend in the various Ethereum hackathons. There are several examples but it suffices to highlight a couple including:

Enable, a P2P social lending platform using Dai that depends on social attestations. The project came out of Consensys Labs virtual hackathon.

LSDAI, a synthetic asset to hedge against Compound protocol variable interest rate, which came out of ETHBerlin hackathon.

The abundance of Ethereum development tools and the Ethereum’s infrastructure maturity allow developers to convert their DeFi products from mere ideas to working products in a relatively short period of time. The same factors are currently lacking from EOS, Tezos, and other Ethereum’s competitors. The result is a widening gap between the Ethereum’s DeFi ecosystem and its competing alternatives. It’s no coincidence that companies which started to target some of these competing protocols also gradually added support for Ethereum to benefit from its growing DeFi ecosystem.

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